Blockchain: Understanding its basics and how it works
Aug 23, 2018

Blockchain: Understanding its basics and how it works

Blockchain: Understanding its basics and how it works

You have probably heard of Bitcoin and blockchain, since they have become really popular these days, but like most of the people, you might not really understand how it works.

So, let's begin with a simple definition of what a blockchain is. A block chain is a constantly growing ledger that keeps a permanent record of all the transactions that have taken place, in a secure, chronological and immutable way. Now, lets breakdown the above statement further for more clarity.

Let’s start with Blockchain is a “ledger”- It's a file, that's all it really is, it's a file that's constantly growing. So, it keeps track of all the transactions, in a permanent way. Which means once a transaction goes in, you can't pull it out. It’s permanently in there, it uses very advanced cryptography to make sure that it's actually locked inside the blockchain. The process, every transaction, gets placed in chronologically so every transaction that happens, happens after the previous one. And finally, it's all immutable which means as you build that all these transactions onto the blockchain, this ledger can never be changed.

bitcoin_featured

Bitcoin

We all know that there two big B in this area, one is Blockchain itself, other is Bitcoin. Many people think that both are same. But here we will bust this myth once and for all.

In most simpler terms Bitcoin is like Github if Blockchain is Git, but its more than that. So, what is Bitcoin. A bitcoin is a type of digital asset that can be bought, sold or transferred between parties securely over the Internet. Because of this bitcoin can be used to store value, much like buying gold, silver and other types of investments.

how_bitcoin_transaction_works

How bitcoin transaction works

Unlike those other types of investments, Bitcoin also serves as a form of digital currency, and you can use it to buy products and services as well as make payments and exchange value electronically. However, different from other types of traditional currency such as dollars or euros which you can also use to buy things and exchange value electronically, there are no physical coins for Bitcoin or paper bills. And when you send bitcoin to someone, or use bitcoin to buy anything, you don't need to use a bank, a credit card or any other third-party type of clearinghouse. Instead, you simply send bitcoin directly to another party over the Internet and it will arrive securely and almost instantly. Whenever you send an email to another person, you simply type in their email address and you communicate directly with that person. It’s the same thing when you send an instant message. This type of communication between two parties is commonly called peer to peer. And its how people communicate every day over the web.

You can send photos, videos and other types of files easily and quickly over the web. However, whenever you want to send money to someone over the Internet you need to enlist the services of a third party such as a bank, a credit card, PayPal, or some other type of money transfer service. You can't simply just attach some money to an e-mail and send it to someone like you would send a photo or some other document.

Why is that? The reason is that whenever you do a transfer of value between two parties, you need to ensure that a real transfer has taken place. In other words, you need to be able to verify that both parties have done what they need to do in a real exchange. For example, if I send a photo I like to another person. I can simply attach that photo to an email and send it. The other person will receive the photo, and that's where you think it would end. But not quite. We now have two copies of the photo. The one I sent by e-mail, and the original file which is still in my computer. What I really did was e-mail a copy of the file with the photo, not the original file. This issue is commonly known as the double spend problem, and why we currently have a need for banks and other types of institutions to act as middlemen in these types of transactions. Without these intermediaries, people could simply try to copy and paste money and it would be impossible to determine if the transaction is real or not.

But if the double spend problem presents such a challenge, how is it that you can send Bitcoin to someone else over the internet without needing a bank, or some other institution to certify that a transfer took place? The answer lies in a global network of thousands of computers called the Bitcoin network and a special type of de-centralized Ledger technology called blockchain. Blockchain is one of the key technologies that underlies Bitcoin, as it keeps a decentralized record of all the transactions that have ever taken place on the Bitcoin network. All the information is captured securely by using math and cryptography to protect it, and the data is stored and verified across the entire network of computers. In other words, instead of having a centralized database that a third party such as a bank to certify that a transaction took place, Bitcoin uses block chain technology across a wide decentralized network of computers to securely, verify, confirm and record each transaction. Because the data is stored in a decentralized manner across a wide network instead of a centralized database, there is no single point of failure. This makes the records which are stored on blockchain, more secure and less prone to fraud, tampering, or a general system failure than keeping them in a single centralized location.

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Bitcoin Miners

Within the Bitcoin network, there are a group of people which are called miners, their role is to process and confirm transactions. Anybody can apply to be a miner, and you could run the client yourself. However, typically these miners use very powerful computers that are specifically designed to mine Bitcoin transactions, and the way they do that is by actually solving math problems and resolving cryptography Issues, because every one of these transactions needs to be cryptographically encoded and secured. And these mathematical problems are what actually ensures that nobody is tampering with that data.

Additionally, for this task, the miners are paid in Bitcoin which is a key component of Bitcoin. Because money in Bitcoin, is not created like you create normal fiat currency, and by fiat currency, I mean currency that's the backing of a country.

Like for example, the United States has dollars, Japan has yen, the yuan comes from China. All of those are actually created by central banks. Bitcoin is not. The way that Bitcoin is created, is by rewarding these miners for their work in solving these math and cryptography problems. Not that you're familiar with the concept of Bitcoin miners and what their role is, let's apply it to the definition of the Bitcoin blockchain.

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So, when you really think it through, what the role of the miners is, is to build the blockchain of records that forms the Bitcoin ledger. And these are blocks and each block contains all the different transactions that have taken place. New blocks are added every 10 minutes with all the new transactions. So, as the miners are processing these different transactions, they build a block, and when a block is Confirmed, it gets added to the blockchain. This blockchain is built all the way back to the initial transaction ever in Bitcoin, which is regarded as the Genesis block.

Anand

Entrepreneurial technocrat with more than 6 years of experience in different roles – Development, Solutioning and management.

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